When you’re self-employed, applying for a home loan can be a little more complex. There are additional checks a lender may want to perform and it’s likely you’ll need to jump through a few extra hoops before you get the green light to go house hunting.
If you’re self-employed and hoping to borrow money soon, here are a few things to keep in mind to ensure you give yourself the best chance of getting your finance approved quickly.
Understand borrowing requirements for self-employed borrowers.
When you’re self-employed, the income a lender will use for servicing is calculated slightly differently than if you were a salaried employee (even if you pay yourself regular wages from your business).
Instead of reviewing payslips for example, a lender will generally analyse the personal income you have received from your business, over the last 2 years. This would be evidenced by your Individual Tax Returns, Notice of Assessments, business Tax Returns and Business Financials.
Income for servicing is generally based on the historical income you have earned from your business, not necessarily what you’re earning now. So, if business has boomed the last 6 months, you may need to wait for this increase to be reflected in your tax returns, before it can have any positive impact on your borrowing capacity.
Lenders not only want to understand how much income you’re personally drawing from your business, but they also want to confirm your business is trading profitability and can meet its operational responsibilities.
Another important question to consider here is: ‘How long has your ABN been active/ trading?’
Your ABN generally needs to be active for at least 2 years, before any self-employed income can be used for servicing purposes.
So, if you’ve only recently become self-employed and/or your ABN hasn’t been registered for 2 years, it’s likely you will need to wait before being able to apply for a home loan.
Understand how your decisions – i.e. changing the business structure from sole-trader to company or moving from a PAYG contractor to Self Employed for example – can impact your ability to personally borrow money.
Let’s say you’re currently earning salary as a PAYG contractor. You’re paid for the hours you work and don’t receive leave entitlements.
On advice from your accountant, you’re considering moving over to becoming self-employed. You plan to work the same hours and perform the same role as before, but instead of being paid via a payroll company, you plan to set up your own business and ABN and invoice directly for the work you do.
Your accountant has run the numbers, demonstrated it’s a good plan in the long run and suggested it might even help to reduce your personal tax liability.
However, if you’re keen to buy your own home in the next 2 years, you need consider how this could impact your borrowing options.
Reducing your personal tax liability is often achieved by reducing your taxable income. This is great from a taxation perspective, but also often has the effect of reducing your borrowing capacity (because now we have less income to demonstrate servicing).
Business owners who do lots of “cash jobs,” sometimes face the same issue of having limited borrowing capacity. The income a lender will use to confirm your ‘capacity to repay’ a new loan is determined by analysing the income you have historically earned, as per your Tax Returns and Notice of Assessments.
Understand which lenders are good for self-employed borrowers
When it comes to self-employed lending, not all lenders are created equal.
Some lenders are great in the self-employed space, having niche policies and products that attract (and easily accommodate) self-employed borrowers.
And there are other lenders who aren’t so great.
You want to ensure you’re targeting a lender with a proven track record of approving self-employed loans, otherwise you might just be wasting your time.
If you’re self-employed and keen to understand your borrowing options, please give us a call on 02 6286 6501.
